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Asian markets rally following statement by PBOC and an easing in Chinese funding concerns

Currencies
Asian markets rally following statement by PBOC and an easing in Chinese funding concerns

By Mike Jones

NZD

The NZD spent the overnight session torn between the positives of recovering risk sentiment, and the negatives of a broadly stronger USD. The net result is that the NZD/USD has continued to chop broadly sideways in the now familiar 0.7700-0.7800 range.

A tentative easing in the Chinese liquidity debacle helped the NZD/USD bounce off its 0.7700 lows yesterday.

Assertions from the PBOC that the interbank liquidity squeeze is seasonal and likely to be temporary helped Chinese and Asian stocks rally back from earlier steep losses.

Notably, our risk appetite index (scale 0-100%) bounced from 45.1% to 50.2% overnight, as US and European equity markets notched up solid gains.

Overnight, there was plenty more fuel for the USD fire as a string of US economic data impressed.

US bond yields reversed most of the previous day’s losses in the wake of the stronger figures. However, the USD has so far failed to make any substantial topside progress, suggesting ‘long’ USD positioning is starting to become stretched.

The NZD/AUD has spent the past few sessions drifting lower, following last week’s spurt up to 0.8500.

The latest update of our short-term NZD/AUD valuation model points to a ‘fair-value’ range of 0.8200-0.8400. This suggests the fundamentals are not yet in place to support the cross around 0.8500.

We’ll likely need to see local interest rate pricing move closer to our view of a March RBNZ rate hike for the NZD/AUD to achieve our 0.8900 year-end forecast.

Following the bounce off 0.7700, the NZD/USD is currently sitting around the middle of the recent range at 0.7750. Once again, the local and Asian data calendar is bare today, portending another fairly quiet session.

However, we’ll again be watching Chinese stocks for direction on the day. Absent another meltdown, we suspect NZD/USD support around 0.7700 will continue to hold, with resistance around 0.7790 likely to be tested again at some point today.

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Majors

A swathe of upbeat US data breathed fresh life into the trend for a stronger USD overnight. But while US bond yields and the greenback are higher, gains have been restricted somewhat by a recovery in risk appetite and associated reduction in demand for ‘safe-haven’ assets.

An easing in Chinese funding concerns has been largely responsible for the improvement in sentiment. Soothing words from the PBOC yesterday, along with further falls in short-term repo rates, helped the Shanghai Composite index rally back from a 5.8% loss to close down just 0.2%. It was enough to juice up European and US stocks, which are up 0.8-1.55% in overnight trade.

US data released overnight will have had the USD bulls smiling. Not only did new home sales and consumer confidence hit the highest levels since 2008, but durable goods orders and the Richmond Fed index both beat expectations. 10-year US Treasury yields have subsequently bounced back to almost 2.6%.

The EUR has been the most notable underperformer. This is perhaps a reflection of ECB chief Draghi’s overnight comments that an exit from accommodative policy is “still distant” and the contrast they provide to recent chatter about Fed tapering kicking in later this year (although rising Spanish and Italian borrowing costs have raised a few eyebrows).

EUR/USD has given up ½ cent but continues to find good support around 1.3050.

Outside of the EUR’s decline, and USD/JPY’s climb from 97.20 to 97.80, evidence of the stronger USD is fairly scant. Most of the other major currencies remain in consolidation mode, with the more encouraging Chinese sentiment helping to limit additional losses in the AUD and NZD.

There is little on today/tonight’s data calendar that seems likely to shake currency markets out of this week’s tight ranges.

Whether or not Chinese stocks can stave off additional declines looks likely to provide most of the direction for currencies on the day. The final estimate of US Q1 GDP will be released tonight. We expect it to remain unchanged at an annualised 2.4% pace.

Other News:

*US data all surprises to the upside: May durable goods orders +3.6%m/m (3.0% expected), S&P home prices +1.72%m/m in May (1.2% expected), Richmond Fed index +8 vs. +2 expected, new home sales 2.1% vs. 1.3% expected.

Event Calendar:

26 June: UK BoE testimonies; US GDP revisions;

27 June: NZ trade balance; NZ ANZ business confidence; EU German unemployment; US pending home sales; US Fed speakers;

28 June: NZ building permits; JN jobless rate; JN CPI; US University of Michigan consumer confidence; US Fed’s Williams, Dudley and Lacker speak.

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